Flex Ltd (FLEX) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to the Flex Fourth Quarter Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) At this time for opening remarks and introduction, I would like to turn the call over to Mr. Kevin Kessel, Flex's Vice President of Investor Relations and Corporate Communications. Sir, you may begin.

Thank you, and welcome to Flex's Fourth Quarter Fiscal 2018 Conference Call. We have published slides for today's discussion that can be found on the Investor Relations section of our website at flex.com.

Joining me on today's call is our CEO, Mike McNamara; and our CFO, Chris Collier. Following their remarks, we will open up the call to questions.

Before we begin, let me remind everyone that today's call is being webcast and recorded and contains forward-looking statements, which are based on current expectations and assumptions that are subject to risks and uncertainties and actual results could materially differ. Such information is subject to change and we undertake no obligation to update these forward-looking statements. For a discussion of the risks and uncertainties see our most recent filings with the SEC, including our current, annual and quarterly reports. If this call references non-GAAP financial measures for the current period, they can be found in our appendix slides. Otherwise, they are located on the Investor Relations section of our website along with the required reconciliations.

In addition, as mentioned in our press release, in accordance with our high standard corporate governance, the Audit Committee of our Board of Directors, with the assistance of independent outside counsel, is undertaking an independent investigation of the allegations made by an employee, including that the company improperly accounted for obligations in a customer contract and certain related reserves. The Audit Committee is working diligently to complete the investigation with expedience and beyond what is provided in the press release. And this is very important, as this is an ongoing legal matter, we will not be able to provide any more information or answer any questions on this issue today. With that, I would now like to turn the call over to our Chief Financial Officer, Chris Collier. Chris?

Good afternoon, and thank you for joining us today for our fourth quarter and fiscal 2018 year-end results. We will start on Slide 2 with our fourth quarter fiscal 2018 income statement summary. Our fourth quarter sales were approximately $6.4 billion, up 9% versus a year ago and at the high end of our guidance range, as all 4 of our business groups met or exceeded their respective sales guidance ranges.

Our Q4 adjusted operating income was $200 million, which was at the low end of our guidance range. And adjusted net income was $150 million. This resulted in an adjusted earnings per diluted share of $0.28, which was at the low end of our guidance range of $0.28 to $0.32.

Q4 GAAP net loss amounted to $20 million, which is lower than our adjusted net income due to several elements. During the quarter, we recognized $94 million or $0.18 primarily from workforce reduction and other costs associated with the targeted restructuring plan in January. These activities were focused primarily on reorganizing our corporate and business group functions and also included consolidating activities at several locations.

The GAAP results also include $22 million of stock-based compensation expense; $20 million of net intangible amortization; and $33 million of other charges, primarily related to a nonrecurring, noncash charge associated with a change in the tax filing position. These adjustments had a $0.32 impact on adjusted EPS, resulting in a fourth quarter GAAP net loss of $0.04.

Now turning to Slide 3 for our quarterly financial highlights. This was our fifth consecutive quarter of year-over-year revenue growth, led by our IEI and HRS businesses, which continue to benefit from expansion with new customers and programs.

As highlighted last quarter, we have been ramping several new programs this year and continue the development of our long-term strategic partnership with Nike. These factors have pressured our gross margins due to elevated investment costs and under-absorbed overhead. For the quarter, our adjusted SG&A expense totaled $229 million, which was up year-over-year by $15 million. The year-over-year quarterly expense growth was primarily driven by incremental design and engineering investments to support our Sketch-to-Scale offering as well as an impact from fiscal 2018 acquisitions, which carried higher design and engineering costs.

Our SG&A expense was decreased in terms of both dollars and percentage of sales as our restructuring efforts provide benefits moving forward. Our quarterly adjusted operating income came in at $200 million, which was modestly lower than the prior year, and resulted in an adjusted operating margin of 3.1%. The depressed operating performance is almost entirely attributed to the increased levels of costs and investments required to support our new businesses and our platform, as we continue to position our company for long-term profitable growth. Return on invested capital or ROIC was 16%. While remaining above our cost of capital, our reduced ROIC reflects the impact from lower profitability combined with higher levels of invested capital, as we are ramping top line growth that is requiring net working capital in installed capacity.

Turning to Slide 4 for our operating performance by business group. Our CEC business generated $45 million in adjusted operating profit, resulting in a 2.4% adjusted operating margin. We continue to make investments in engineering and building out our reference platforms for the cloud data center market place while we transition our customer portfolio in this direction. Both on a year-over-year and sequential basis, the business had lower revenues which pressured profitability with under-absorbed overhead and higher investment costs.

Our CTG business earned $24 million in adjusted operating profit, resulting in an adjusted operating margin of 1.5%, which is below our targeted range of 2% to 4%. This performance was driven by the seasonal decline in revenues, the pressured profits, due to the lower contribution and continued losses from our strategic partnership with Nike.

Our IEI business generated a record adjusted operating profit of $68 million, achieving a 4.1% adjusted operating margin, which is inside our targeted range of 4% to 6%. The improved profitability reflected strong revenue expansion, which has been led by several new customer programs and an improving overall demand across its diverse markets that is contributed to absorption benefits.

Additionally, IEI continues to benefit from greater Sketch-to-Scale engagements, thereby realizing higher margin content and the mix of its products and services. Lastly, our HRS business delivered quarterly adjusted operating profit of $97 million, and an operating margin of 7.8%. The business continued to deliver solidly inside its targeted margin range while it simultaneously invest in expanding its design and engineering capabilities and ramp new customers and programs.

Turning to Slide 5, let us review our cash flow generation and highlights.

Our operating cash flow remains solid and came in over $750 million for fiscal 2018. Our fourth quarter cash flow from operations amounted to $323 million, which marked our 15th consecutive quarter of generating over $100 million in cash flow from operations. Our inventory level has increased over $400 million from a year ago, as we continue to operate in a challenging and constrained supply environment that is requiring us to carry higher levels of inventory to support our revenue growth and multiple large programs that are ramping.

Our inventory management helped us to fulfill customer demand and achieve better inventory churns than a year ago. Overall, our net working capital ended just over $1.6 billion and amounted to 6.4% of our net sales. We believe that our current prospective business mix will result in a net working capital as a percentage of sales to remain within our targeted range of 6% to 8%.

We continue to invest to expand capability and capacity this quarter, as our capital expenditures totaled $128 million, exceeding depreciation by just under $19 million. A greater percentage of our CapEx has been allocated to support our expanding IEI and HRS businesses. These investments are supporting long underlying product life cycles and, in many instances, have required us to outlay capital investments in advance of ramps.

Our free cash flow for the quarter was $195 million and $236 million for the year. For the year, we repurchased roughly 11 million shares for approximately $180 million, which amounted to 76% of our free cash flow and reflected our commitment to return value to our shareholders. During the fourth quarter, we did not repurchase any shares.

Please turn to Slide 6 to review our balanced capital structure. We have no debt maturities until calendar year 2020, and we have over $3 billion in liquidity. We continue to operate with a balanced capital structure and, together with our cash flow generation, we have the strength and flexibility to support our business over the long term.

Before I turn the call over to Mike, I want to reinforce that fiscal 2018 marked an important year for Flex as we undertook numerous options to evolve our business, to improve our Sketch-to-Scale solutions capabilities and to strengthen the platform.

So while elevated levels of investments pressured our operating performance in the near term, they've also positioned Flex for future earnings leverage as we move into fiscal 2019 and beyond. Now I'll turn the call over to Mike.

Thank you, Chris. Fiscal 2018 marked a return to overall revenue growth for Flex. It also highlighted that our strategy of driving portfolio evolution and investing in our Sketch-to-Scale capabilities is driving new engagements and revenue momentum.

Please turn to Slide 7 for Q4 fiscal 2018 business highlights. Our portfolio evolution created accelerated revenue growth over the past year and has positioned us for the same in fiscal 2019. As Chris said, this is the 5th straight quarter of year-over-year revenue growth for our business.

IEI and HRS have led the way, up 26% and 19% year-over-year in Q4. Both IEI and HRS ended fiscal 2018 with revenue growth above their long-term target of 10%, due to successfully expanding Sketch-of-Scale capabilities and adding new customer relationships. IEI and HRS totaled 45% of sales for the quarter and 43% for the full fiscal year.

Our profitability mix also continued to skew heavily towards IEI and HRS, which accounted for 71% of operating profit dollars in Q4 and 68% in fiscal 2018. As expected, IEI set a new individual record for quarterly revenue and profit and HRS hit record revenue.

Our top line momentum continues to be fueled by new engagements and customers that are attracted to Flex platform for its ability to take advantage of broad collection of assets and capabilities that enable integrated cross-industry solutions. To further support this, we continue to improve and expand our design capabilities and reference platforms for new products and markets. The pace of disruption is accelerating, as technologies converge, which plays to our strength because we are at scale in so many industries.

We are finding numerous ways to partner with customers and enable our innovation by leveraging our deep cross-industry expertise into complementary industries [for a] supply chain with success. To accelerate this transition, we announced a targeted restructuring plan that will make Flex a faster, more agile company that will be more responsive to the changes that are rapidly occurring in the marketplace and better leverage our cross-industry capabilities.

Our efforts were focused on corporate functions and in breaking down systems and silos that reduced our speed and effectiveness. Our plan was deployed and completed by the end of Q4. We will see the benefits in both the top line and profitability over the next few quarters.

We continue to make broad investments in manufacturing automation. These investments are being actively leveraged in our Nike strategic partnership. This depressed our operating results through fiscal 2018. And while we saw improvement in the performance of this project, our Q4 performance did not meet our targeting at exiting at a breakeven level.

For the year, we incurred just over $70 million in losses related to Nike. While fiscal 2018 was a difficult year in terms of learning, creating and investing further partnership, it was not without many positive developments that emphasized why Flex and Nike remain extremely committed to our strategic partnership. For example, during fiscal 2018 we made a very -- a few very important breakthroughs, such as moving into our new factory in Q3 and further optimizing in Q4, which has allowed us to realize productivity improvements of over 40%; ramping and delivering NIKEiD volume successfully from our factory at substantially reduced lead times; and, importantly, co-developing a unique automation system together with our partner which was released to production 2 weeks ago on April 11. This new system is designed to deliver even greater productivity gains, yield improvement and enhanced quality. Most importantly, Nike has released a full set of products designed for our automation system, which is now beginning to ramp in mass production.

We are confident that these accomplishments will enable us to significantly improve our fiscal 2019 and position us for greatly reduced losses in the first half of 2019. We are targeting profitability during the second half of fiscal 2019.

Now I'll turn to Slide 8 for highlights from the year. Fiscal 2018 also marked a return to overall top line revenue growth, with just under $1.6 billion or 7% growth versus fiscal 2017. IEI and HRS drove 43% of total sales and 68% of adjusted operating profit, capping an extraordinary year of portfolio evolution. It's worth noting that exiting fiscal 2018, the combined IEI and HRS were nearly $11 billion in sales with double-digit compounded annual growth rate for both revenue and operating profit. During fiscal 2018, we managed to balance organic investments with new business expansion and returns to shareholders.

Please turn to Slide 9 as we review revenue by business group in detail. Our fourth quarter saw a strong year-over-year growth in 3 out of our 4 business groups. Our diversification remains strong and balanced. Our top 10 customer revenue concentration improved to 42% of total sales from 46% a year ago, a very well balanced distribution across industries and customers with no customers above 10% of sales for the ninth consecutive quarter.

Our CEC business was down 5% year-over-year to $1.9 billion versus our expectation for a 5% to 10% decline. While CEC's legacy end markets remain challenged, its design capabilities continue to improve and expand, which is leading to new customers and business opportunities, particularly in cloud data center and converged infrastructure solutions, which rose over 20% year-over-year.

For the June quarter we expect CEC's year-over-year revenue reductions to be 5% to 10%, driven by reductions in traditional legacy businesses offsetting strong growth in the cloud data center and converged products. CTG revenue of $1.65 billion was up 7% year-over-year in line with our guidance range of up 5% to 10%. The growth was mostly driven by strength in products from high-growth emerging markets such as India. We are seeing substantial demand for consumer products for our India operation, which we have scaled over 15,000 employees.

For the June quarter, we are guiding CTG revenues to be up 15% to 25% year-over-year coming from the expansion of new programs. IEI's strong growth streak continued once again with record revenue of $1.6 billion, up 26% year-over-year and above the expectation of 15% to 25% led by successful new program launches and expanding end markets. IEI saw continued growth across its home and lifestyle and energy portfolios and continue to experience strong Sketch-to-Scale related bookings across its diverse offering, which came at new record levels from fiscal 2018.

For the June quarter, we're expecting continued strong IEI revenue growth, up 10% to 20% year-over-year led by new program ramps. HRS revenue grew for the 33rd straight quarter on a year-over-year basis. This quarter, revenue rose to a record $1.25 billion, up 19% year-over-year at the high end of expectations for 10% to 20% growth as both automotive and medical grew.

In our June quarter, we expect HRS growth to remain strong with revenue up 5% to 15% year-over-year as we introduce new programs and expand existing programs for both medical and automotive.

Let's turn to our first quarter fiscal 2019 guidance on Slide 10. Fiscal 2018 was an important year for Flex as we expanded our platform businesses and Sketch-to-Scale solution capabilities and position ourselves for accelerating growth. We anticipate some near-term pressure on our profitability as we support the revenue growth. As we progress this year, we expect fiscal 2019 to show strong growth in revenue, adjusted operating profit and adjusted earnings per share.

Let me provide a little more context on how we see fiscal 2019 shaping up. We certainly plan to provide even more detail at our May 10 Investor and Analysts Day, but ahead of that I'd like to level-set the discussion. Revenue growth was roughly 10% year-over-year in the back half of fiscal 2018. And we expect the strong rate of growth to continue throughout fiscal 2019. To support this strong growth, there will need to be higher investments into working capital and CapEx and will incur greater startup cost. The result of this should be accelerated earnings growth and year-over-year earnings growth in the back half of fiscal 2019. The higher revenue will enable better absorption of manufacturing overhead and display substantial SG&A leverage due to both higher revenue and also the reorganization we implemented in Q4.

We view these as a very positive development for our long-term earnings, cash flow and also competitive positioning, while understanding they will pressure our short-term results in Q1 and Q2 of fiscal 2019.

The higher revenue will enable better absorption of manufacturing overhead and defray substantial SG&A leverage due to both higher revenue and also the reorganization we implemented in Q4. We view these as a very positive development to our long-term earnings, cash flow and also competitive positioning while understanding they will pressure our short-term results Q1 and Q2 of fiscal 2019.

For the new quarter, we expect revenue in the range of $6.3 billion to $6.7 billion, adjusted operating income is expected to be in the range of $170 million to $200 million, adjusted earnings per share guidance in the range of $0.22 to $0.26 per share based on a weighted average shares outstanding of 535 million. GAAP EPS is expected to be in the range of $0.15 to $0.19 as a result of stock-based compensation expense and intangible amortization.

This guidance excludes the impact of new revenue recognition accounting, which will be adopted by Flex in our first quarter. The adoption will change the timing of revenue recognition for certain customer contracts but does not change the overall profitability or cash flows.

With that, I'd like to open up the call for Q&A. So operator?

(Operator Instructions) Your first question comes from Amit Daryanani with RBC Capital Markets.

I have 2 questions. Maybe first to start with on Nike. Mike, I think you said losses up until we get to the back half of fiscal '19. Can you maybe just help us understand what changed versus the expectation of a breakeven in the March quarter that's getting pushed out by 2 to 3 quarters? And is the trajectory or the expectation that losses remain fairly consistent with that $70 million kind of run rate till we get to the back half? Or does that burden kind of start to ease up?

Yes, so what changed? As you know, we're undergoing a very good program. We expected -- we had hoped to break even -- we had set a goal of exiting the end of the year at breakeven just to make -- just to go all through the entire year. It's something we tried to achieve, and we didn't achieve it. Now what changed? There were a couple of levers that were driving us towards that goal. One was going into the new factory, we thought it would bring us a lot of productivity gains, which they did, quite frankly. We went into the factory in Q3. I'd call that full implementation in Q4. We still didn't open the factory until Q4 and some other things. We got a huge productivity gain on the back of not being spread out into like 3 different factories. I quantify that by about 40%. So that was a huge positive. But the one thing from the very, very beginning that we really need to have is we need to have the supply-demand process and the design for -- design for automation products really coming to us in [Bali]. And that was something that wasn't even necessarily invented when we set the goal at the beginning of the year. And we've probably been very consistent to talk about -- if you had talked about that at the beginning of the year, the whole concept of regional manufacturing is automation, the whole concept of automation is you can't do automation, you have to do design of products. So is that something that we control entirely and we have to work with our customer to create the right solution? I'd say our automation system took maybe a little bit of time because now we have to actually invent the automation, but then you have to go back and invent the products that need to go on the automation, and you actually have to find a home from a market standpoint for those new products. So it's not a trivial set of things to all get working together. It's new. In the grand scheme of things, can we push this through the second half of the year? It means we're off by, call it, 6 months. Your second question is, will the losses go down over the first 6 months? The answer is absolutely. We would expect them to -- just in a very gradual and linear way over the course of the next 6 months, losses will dissipate, and then hopefully, in the second half, we'll switch to profitability. So in the grand scheme of things, we always thought this to be a long program. We couldn't be precise with it because we are inventing. It was entirely new product category, and we're very new to it. We always thought this would be a decade-long kind of implementation and commitment. No one has proven that. We've been working on it for 2 years. We hope to get from losses to breakeven. It's going to take 2.5 years because our current forecasts in the grand scheme of things, it's not huge, but it's going to push out. The revenue expectation and the breakeven, and then the transition into higher margins push out by that amount. So we're still committed to the long-term potential of the program. We're still committed we'll be -- we'll get it to the March target that we have on there. I think it's just -- think about it as just being pushed as opposed to that being impossible.

Fair enough. That's really helpful. And if I could just follow up. Chris, when I think about -- when you -- you guys talking about increased investments in working capital and CapEx, can you maybe just level set? How do I -- how do we think about fiscal '19 from a free cash flow, from a CapEx perspective? Because '18 was obviously a very heavy CapEx year for you already. So just maybe help us think about free cash flow, CapEx in '19. That'll be great.

Certainly, Amit. So as we highlighted, fiscal '18 we invested greater depreciation to the tune of over $8 million. It was a bit higher than what we had talked about midway through the year. Our CapEx continues to be focused around growth areas of the business as well as a lot of prestaging work, HRS and IEI type of activities. And what we've been finding is in many instances, we are essentially having to preposition our investments much sooner and then before the ramp stage is forming. So there's a fair amount of investment that's going into this year that had no revenue associated with it, similar to this next year. We also talked about some accelerated growth that we're seeing that's requiring us to put capital to use in certain areas to expand necessary capacity and capability. So as we think through the fiscal '19, which we're going to be able to address at more light at the Investor Day, you're going to see us still carrying elevated levels of CapEx beyond depreciation. This is a departure from where we were at last year. Also, a different type of a revenue picture that we're seeing and the successes that we've been able to see in terms of the bookings of business inside of HRS and IEI have also enabled us to have confidence around expanding some of those investments. So I think overall, you'll see a continued increase in CapEx into '19. We'll give you more detail on it. I'd say that what you'll see for the first quarter is going to be very similar levels that we had back in December.

And I'll just add there's really 2 categories of CapEx investments that we're doing in this year, and one of it, you're already starting to see because we've -- for the last half of FY '18, we're already growing 10% a year. So we're achieving along that trend as we get into FY '19. So there's a CapEx required for the near-term revenue growth. That's one avenue on CapEx. The other thing is we'll put close to $100 million of CapEx into HRS programs, where there will be no revenue in FY '19. But obviously, very significant ramps going into '20 and '21 as a result of major new programs coming on. So that's a $100 million of pressure that are going into what we consider to be much better, higher-margin HRS programs, but there's no revenue for them in FY '19. So there's really 2 classes of investments in the CapEx this year. One, the near-term revenue growth that you're seeing; and the second one, some major programs that we'll actually see revenue on in FY '20 and '21.

Your next question comes from Steve Milunovich with UBS.

I know you're going to want to address this more at your Analyst Day, but you did have $1.80 number out there in 2020 and the $1 billion run rate on Nike. Is there any update can you give us? Are we talking more like $1.40, $1.50 in EPS? And at the time, I think you had said that Nike was maybe 15% of the earnings improvement between then and 2020. So it wasn't anywhere close to the majority. It was still IEI and HRS. So does that suggest you can still get somewhat close to that goal?

Thank you, Steve. Definitely, we're going to have the opportunity to provide that longer transition at the upcoming Investor Day. What I would highlight today, there's a couple key fundamental levers that remain intact, and I'd say some of them are even ahead of track. But as we talked on the call, certain ones, such as Nike and CTG overall, are a bit behind. Nike in terms of that vision was a substantial portion of the CTG lever. We didn't quantify specifically, but we had anticipated a significant revenue provision from that group plus an elevated level of margin at that time. So if you thought of this $0.22 that we are targeting around for CTG, a significant portion, roughly half, you can say, was earmarked improvements in growth on Nike. Obviously, that's -- we're disappointed that we're having to continue to push this out, but we have a long-term line of sight into this being an achieved goal. It's just not going to be in the 2020 vision. So that in itself will put some pressure on. What I go back to is that we're solidly diversified across the portfolio. We have substantial scale now inside of our IEI and HRS businesses. IEI positioned nicely itself as a growing portfolio, capturing more business itself and an improved operating performance. HRS, as you think about it today, is -- has securely positioned itself as a Tier 1 partner and scaled globally and has numerous capabilities and has real nonperishable bookings. So that's pretty much intact. And our CEC business continues its portfolio transition to create a cloud data center and converged infrastructure opportunities in leveraging its investments. When you go back to CTG, CTG has a digression from where we sit within Nike. But as Mike was highlighting, we're seeing upsized growth in emerging markets that's going to contribute nicely to operating profit dollar expansion. So lots of puts and takes. We're going to unpack that for everyone here in another couple of weeks, but we continue to invest and operating and manage the business to deliver meaningful long-term revenue growth, and we anticipate that journey to $1.80. Whether it's achieved 2020, we have line of sight to achieving that in our future.

And you could you talk a bit about the tariff discussions and what that might mean for you in terms of either margin pressure and your ability to move, work around the world as necessary?

So we're actually pretty well structured to be able to handle whatever tariffs come at us, and I think we have the largest system in Mexico, Brazil, India, Eastern Europe. We're the largest electronics manufacturer in the United States. These tariffs move around. We're actually built to be able to handle the boat. And anyway, that's actually a core feature of how this industry was actually created and value-add that actually happened. The only place we're not, number 1, in terms of size and scale and experience and breadth of manufacturing technologies is actually in China. So everywhere else, we're -- we'll -- we've got a very strong footprint. So if a company wants to move around the world, we actually think that's an opportunity for us to help them out. The bottom line is, we actually don't anticipate any real revenue or OP shifts relative to the tariff story. There'll be little puts and takes here and there but on average, if things move around the world, I think we're well positioned. If things don't move around the world, I think, like Chris said, we've got a massively diversified portfolio. And as different tariffs happen, they are going to happen. So we don't view it as being meaningfully impacting our business.

Yes, and just to expand on that, we're well positioned given where the tariffs are sitting today in terms of not having a significant portion of our goods and services be directly impacted. And it was -- there's a lot of uncertainty in how these develop, but, again, most of the goods that we're dealing with today are not under these existing tariffs.

Yes, one thing I'd add, just getting back to the India conversation, like Chris said, we didn't anticipate such a rapid growth in India, which is actually new demand for us. So it's incremental operating profit dollars that we'll see on the back of that. That' going to be one of our offsets when we get to Analyst Day about with the Nike being pushed out. But the tariff changed dramatically in India, and that's actually usually helpful for us. So the tariff on inbound goods on average among electronics coming in from China is like 10%. So where there may have been a lot of goods being manufactured in China that now need to be manufactured in India, good chance we weren't building those in China, and we will be building them in India. And even some of the India demand because -- on the strength of that developing economy and the strong growth rates, we're going to have new demand. So that tariff, we're going to see substantial opportunity as a result of it. So -- and the reason I think that we'll see a substantial opportunity on it is we already have 15,000 people there. Huge operations and quite a bit of experience. So I would expect that, that available capacity, we know how it's going to be able to put to use right away. So that is 1 tariff that's probably incremental and will meaningfully move a little bit of our business.

Your next question comes from Steven Fox with Cross Research.

Just 2 questions for me. First of all, just bigger picture, Mike. The company has always had a lot of ambition around leveraging. A lot of core competences, probably more than most companies do. But you get into these situations where maybe the investments come ahead of the actual revenues, and then there's other investments that follow. So I was wondering as a public company how you're managing that, all of these opportunities, in a way that doesn't continue to result in sort of further investments without seeing the net returns. And then I had a quick follow-up.

Yes. Yes, that's a good comment. I mean, one of the things that we try to do is to take the opportunity available to us in the marketplace consistent with the returns. The Nike thing was unanticipated if Nike wasn't a $70 million loss, and that was a $20 million loss. You won't -- have asked this question just now. So we have one program that we really have behind us, which is disappointing. But one thing I can say about the new programs that we're ramping, they're massively the low-risk programs, so I don't think we would go into a high-risk program. So for example, if we saw an opportunity as a result of our knowledge of Nike to go into the apparel industry to kind of reinvent the apparel industry, we would not do it. So because it's a risk profile that's too high for us and we already have -- until we mitigate the other risk profile like a Nike and figure that industry out, we won't invest in it. The programs we have that we're ramping revenue on, we view as very low-risk programs. They're typically S&P lines or massively solid companies with very stable marketplace positions. So we kind of view this -- view the investments we're making as being really low risk. We're not trying to reinvent things. The only other place that we have some investment is in -- really in YTWO, which is minor. You can't even see it. And what's interesting about YTWO is there is virtually no inventory and no CapEx. So it's actually more of a trading model than it is anything else. It's trading in an IT model as opposed to a heavy CapEx model like our typical business. So I actually think that the investment that's a little upside down is Nike, and we just got to get that behind us. And the other ones we kind of view are in balance with the opportunities in the marketplace.

Great. I appreciate that perspective. And then just, Chris, as a follow-up, understanding the environment you're operating in from a working capital standpoint, is there any -- do you have any clear line of sight into when some of these pressures start to ease in terms of building inventory like you have been? Or is it kind of hard to read into fiscal '19?

So are you talking about the inventory environment and the need to...

Yes.

Yes, I mean, as we said, and we -- the -- we've been operating in a pretty dynamic supply environment for a while now. And definitely, there's elevated tightness, steady lead times and a bunch of different items that'll be on allocation. We've been contending with that. We're actually seeing that as something that's going to be sustained for a while. And while we're ramping not to displace the demand, we've been able to capture and carry a bit higher inventory level. We'll probably see that sustaining itself throughout this year. That, coupled with the incremental investment, is going to be what is the elevated level of cash utilization that's going to take out some of that free cash flow generation that we've anticipated.

Your next question comes from the line of Adam Tindle with Raymond James.

Mike, first, I just wanted to ask -- I understand that the Nike losses weighed on the year. But if we add back that loss that you quantified, operating margin would still be flat despite more than 6% revenue growth and strong growth in IEI and HRS. Peers are seeing improved margins in their EMS businesses. So ex Nike, can you just reflect on the rest of the business and what changes moving forward to start seeing margin improvement?

Yes, I think -- well, to me, it's what we've already outlined. Nike has to get to breakeven, hit the goal of above breakeven. It's -- it will be additive -- pretty additive. But it's -- even just getting to breakeven, that's an important requirement to get to good margin expansion. When you look at the other businesses, you have IEI, which is in its fourth or fifth year of margin expansion. So you'll see that continue over the course of the year. So I think since last year, they ended up with -- last few years, they're -- last year, I did 3.9%; and year before that, 3.6%; year before that, 3.4%; and closed the year at 4.1%. And we would expect their margins to expand over the course of FY '19. So they're basically on a tear both from a revenue growth standpoint and from a margin expansion standpoint. HRS is also very, very strong in terms of margin at 8%. It's not going to go significantly higher from there, and we view that as a poor margin kind of profile. We may have an opportunity to improve the margins, but it won't be that much. So they'll continue to be -- we look forward to them -- they continue to be a revenue and growth story as opposed to margin expansion. And when you look at the CEC business, which is another driver, one of the things that we said last year is we expect in FY '19 we needed to start to move to a revenue growth year, and we do expect to see that over the course of FY '19 as well. So that vision is intact from where we were last year, and we'll have to see -- we expect that to be a second half story, but that's consistent with exactly what we saw last year and communicated at Analyst Day. But interesting, when you start adding the 10% growth into -- and look into have a very substantial growth year in FY '19, and you also add the SG&A optimization that we did, you'll see a very significant move in the SG&A rate, both on the back of revenue growth and also margin expansion. So you'll actually see that margin expansion to occur relatively rapidly once we get past our start-up costs Q1 and Q2. So we would expect that to start hitting in Q3 and Q4, and that margin expansion will be on the back of a real -- a much stronger topline. So that's when you're going to see it. And I think the discussion I've given you that we've laid out are actually real positive for margin expansion, and that's what we actually expect to see in Q3.

Okay, that's helpful. And just as a follow-up...

Adam, just to build over that, using your math when you add back the Nike losses for the year, operating profit dollars for the company would be up 5%. And it's also reflective of while we're still making many investments. Now that's to expanding the design and engineering capabilities across the portfolio as well as funding several new businesses that are in the system that have yet to yield or even ramp to earnings. So those are reflective of a position for us today that the earnings power is not reflective of what we anticipated being able to accomplish as we move through and also get the benefits of scale.

But I think it's worthwhile -- the Investor and Analyst Day is like 2 weeks. We'll unpack our strategy for the -- each of the different business units, what we think the margin and growth profile looks like with them. And we'll also give you an update on the 2020 vision. We actually view the opportunity to get higher margins as being enhanced by the strong revenue growth. And I said that Nike being delayed 6 months, which if I put it into a -- or maybe not 6 months, sometime in the second half, hopefully 6 months. Outside of that, our story remains intact. I mean, IEI is killing it. HRS is killing it. Our portfolio evolution continues to make very, very strong progress and evolution. And it would be -- our CEC continues along flat and is not contributing to margin expansion of the company, as you know. But as we move towards the data center investments paying off, we actually think they'll pay off. So you'll see that unpacked in pretty good detail in just a couple of weeks, and I think you'll find it to be a very strong -- operating profit dollar, earnings per share and even margin percentage expansion story will be pretty significant over the course of the year.

But we also understand your point here in terms of the fiscal '18 performance wasn't at the level that we had anticipated, and we actually are making decisions and operating with management to deliver [many] improvements.

Okay, that's really helpful. Just as a very quick follow-up, could you help us understand, you alluded to this, but the nature of how back-end weighted fiscal '19 might be? You typically do somewhere around 55% of EPS in the second half. Are we talking more like 65%? And just what -- level of visibility into the drivers of that.

I think what -- well, we framed out earlier one of the larger drivers is really the improved performance of the back end for Nike. I think you'll also see that -- another lever being the revenue leverage that comes into the system as we've been able to really cap and contain our cost structure. The abatement of start-up program costs in multiple locations and programs for that data base. And so those are some of the more direct levers. I would say that it will be a heavier weighting in the back end of this year, but we're just not going to be -- given that clear projection at this time, we'll be able to give you a better view as to how the whole framework rolls out in Investor Day.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

I have 2. First question is a follow-up on Nike. And so maybe you could a bit more explicit about whether or not the company has identified the steps that they'll need to take to get Nike to profitability. You sounded like revenue volume was one of the things that needs to take place based on your earlier comments. But if you could be more specific if it this is an exact level of revenue you need to achieve and as to whether there are things around productivity and cost that need to take place. Maybe identify those. Or is there still work that needs to be done to figure out what needs to happen to fix that?

The key to Nike is to have design content -- shoe content that's designed to run on a highly automated line, a highly automated line that's turned on, the content has been developed, and it just needs to ramp. So this is the key thing we need. We don't need any more optimizations of a factory. We have a good factory flow. We just need the right content to run. What you can't automate, we believe manufacturing hand-stitched kind of manufacturing, you can do pieces, but you can't actually achieve the goal of doing real regional manufacturing without that process. So maybe I'm mumbling around a little bit, but it's like you have to have design content. That design content has to run on fully automated lines. We'd turn those fully automated lines on. We'll run it really well. We'll ramp up those fully automated lines over the course of the year. We can get to volume. And this is what we need to get to profitability, the right shoe and the right -- with the right automation system. And this is our way of getting out of it. So it's a very, very discreet, specific activity that we're undergoing, all with the help and support of our customer who has been in this with us for quite some period of time. And what we'll see as that ramps up is we'll expect to see the losses dissipate and movement. It's disappointing that we're talking about this still, but it's actually not -- it's actually complicated. That's why we kind of started off 2 years ago saying that we'll think about this in a decade. We had no idea how long it would actually take because we were reinventing shoes. Now that's a category that we've never gone after before. But that's a very specific activity that we need to book to profitability. And we're -- we think it's going to happen over the course of these next few quarters.

Okay, that's helpful clarification. And then for my second question ....

And while we're waiting -- Mark, I -- while we're waiting, I mean, I -- I mean, Nike is killing me, too. But while we're waiting, IEI is killing it, HRS is killing it. So you see we're turning the corner. We have a whole new category coming up, which is called India manufactured, which will be, at the end of the day, for a broad range of categories, which is going to be pretty incremental in terms of earnings per share even over the course of FY '19. We've got very, very strong bookings in our target product categories in HRS going into FY '20. And -- but we do run a very, very diversified portfolio. So we will work on all those other levers kind of to make up for the delay in Nike getting to where we need it to be.

Got it. That's helpful. And my second question is actually on the HRS and IEI guidance. And certainly, I know the guidance in the June quarter saw a good absolute growth rate in both of those groups, but it is a bit slower in both segments in the June quarter versus March. So it sounds like that's just a one-quarter moderation and then it stayed at a pretty high level throughout the year. But anything you guys just would point to that's maybe causing a little bit of a lower growth rate in the June quarter in those segments?

I don't think there's anything that I would clearly identify. We -- inside of the IEI, we had a really strong Q4 with the greater than 25% year-over-year growth. That was driven by multiple programs that are ramping. I think that you just see some positives. Some of those are at a level that's sustained and more stable. We anticipate bringing out some other ramps that aren't maybe reflecting just yet in terms of the revenue. Inside of HRS, I think it's a balanced mix of the programs that are in place, and there are several new programs that we continue to bring up that will be coming on the latter part of this year, some larger-scale ones. And we'll have Paul and the team talk more to in terms of the future for HRS, but I don't think there's anything clearly identifiable that I'll point out. And Mike, I don't know if you have anything you kind of...

No, those operations are doing extraordinarily well. IEI was up 20% last year. HRS was up 15% last year. And these are big numbers with a combined balance like $11 billion now. It's -- we're going to see that level of growth every single year. What we said kind of 4 years or 5 years ago, we expect a 10% growth rate out of the bundle. For the foreseeable future and for the last 5 years, the growth rate in that bundle has right been around 10%. So it's kind of have option; it's kind of have balance. This year was a killer year because not only did we achieve the revenue growth rates but IEI just continues to improve margins all year long. The bookings of both groups are very, very strong, and so we're really pleased with how they're operating, and I think they're super valuable part of the portfolio. And every year that we did more and more work in each one of those categories, we build a stronger and stronger portfolio upon which you can (inaudible). So there's really 2 advantages that drive revenue in our business because every time you drive revenue, you drive more experiences into a product category that you can then go to the customer itself. So all we see is a continually competitively advantaged position building that sets us up for the future, yes. So to where we'll be, we don't have any complaints about.

Your next question comes from Ruplu Bhattacharya with Bank of America Merrill Lynch.

Two questions. The first one on Nike. Is the sequential operating margin decline between the March and the June quarters all Nike related? And Mike, you -- I think you said maybe in 2 quarters you'll get breakeven. Realizing that this is a very complicated ramp, I mean, how confident are you? And what steps are you taking to enable that? Are you restricting the models -- the number of models that you currently take on? I mean, how can you measure and how do you know that you're going to get to breakeven in 2 quarters versus in 3 quarters? Why wouldn't it take longer than that?

Okay. So we don't if know it's going to take 2 quarters or 3 quarters. We haven't gotten there yet. So we don't know the future. We just know what we're implementing and what we're trying to get to. And yes, we said in 2 years, we can get to breakeven. And maybe it'll be 2.5, maybe 2 and 3/4. But we're not sure, and we don't know. All we do know is we're running a whole portfolio of businesses. And the losses aren't just Nike. In our business, when you ramp 10%, when you have a system as large as ours and you have to ramp up 10%, it's a huge business. Because any time we ramp business, we're going to have start-up costs in a system this size. And what I mean by start-up costs is, you have to buy inventory before you can have revenue. You have to buy equipment and install it and qualify it before you can have -- run revenue across it. And you'll have to train operators before they can build revenue. And then after you do all those things, you have to get it a deal. In a rapidly growing business in that industry, we're going to have start-up costs. So we're actually having a rapidly growing revenue, which I actually don't see -- and -- in order to comment about the other manufacturers. I don't know anything that is growing its revenue as rapidly as we are. And as we grow that revenue, we're going to have to pay those costs of every production. We're going to have find -- so those are also a headwind for us. Right now, it's not just Nike. So we're happy that we're booking lots of business. We're happy that we're competing in the marketplace in a positive way. And we're going to have to get to start-up costs. But once we get to start-up costs, we will take that plateau of earnings. And we're not going to get the plateau of earnings up unless we do some investments to move them into a new plateau, and that's -- actually, the plateau is what we're expecting, what we're trying to communicating as we think about getting into the second half of FY '19. So we'll unpack that in more detail with you as we go forward, but I do want you to appreciate that. Being in the manufacturing business, all the cost of production, you have to ramp up, and there is a cost before you actually achieve revenue and hopefully at yield targets.

And Ruplu, in part of the prepared remarks, we were identifying several elements of what we were calling breakthroughs that are enabling that operational view that we've set as being confident that we'll significantly improve fiscal 2019 in comparison to 2018 and especially greatly the reduce the losses in the first half of 2019 versus 2018. So the trajectory that we're on with Nike continues to improve. It is sustaining losses and will be sustaining losses, as Mike had highlighted, so we see ourselves at breakeven later in the year.

Operator, it looks like we -- sorry, it looks like we're at the top of the hour now. I know that we got started a minute or 2 late. I believe there were some webcast issues. I think we can go ahead and have time for 1 more question.

Your final question comes from the line of Paul Coster with JPMorgan.

Two follow-up questions really. Can you talk to us a little bit about the sort of the contractural sort of parameters of the relationship with Nike? Is it take or pay? And do you have the option of using some of the capacity that you've created there for -- in Mexico for other customers? And are you actively doing so?

Yes, so we -- we're not going to go through the contract details of our customers. So we can't actually do that. Let's just say that we believe we're -- we've developed a mutually beneficial relationship. It's a relationship that we continue to work on and develop and adjust and change as we need to. We still believe we'll earn on this deal over time with the help of our partner. They have massive skill, and we have a massive opportunity in front of us and we're still chasing that. I mean, we continue to look at this in the lens of a decade, as you guys know. And although we like it to happen a lot faster and start earning on that, we still believe that that's in sight. We have a fair relationship with the customer, and we continue to move forward. So -- but we can't go to any details about this. And as far as what we want to think about doing another contract, I mean, I think we already have a contract with a market leader that has, like, I don't know, 60% of the world's market. I think that's probably enough for us that we don't need to think beyond this. We need to think about taking it for Nike and not worry about other guys. So if we get this one profitable.

Okay, let me finish up and say that we're going to be -- we're excited to be having our Investor and Analyst Day on May 10. As you can tell by the questions, there's a lot to unpack. We're actually excited to do it. And it could be in San Francisco when we'll look forward to seeing you there. We'll further expand on the power of our platform. This is what's driving a lot of reignition of growth. We're going to show you the strength of the portfolio and the breadth of the portfolio, the evolution of the portfolio and how we're positioning our investments for the future. So I think you'll get a lot of detail on that just in the next couple of weeks, and we look forward to seeing people then. Thank you very much.

Thank you. This concludes the call.

This concludes this conference call. You may now disconnect.